Mortgage Interest Deduction: Myth or Freaking Awesome?

Mike in LBC wrote in with a great question. In case you don't read the comments (come on, join the discussion!), here is what he asked:

El Bee, could you school me on a blog when you have a few?

This article will probably interest you regardless:

http://finance.yahoo.com/news/5-Home-Ownership-Myths-to-usnews-3874381652.html?x=0

But I was particularly interested in the "myth" that you don't save in tax deductions from the purchase of a home.

I'm really scratching my head about THAT one.

Here is what that section said:

"I'll get a tax deduction." While the government provides a tax deduction for mortgage interest as well as other tax credits related to energy-efficient appliances and other green technologies, these benefits do not outweigh the expenses. Many homeowners find that even with the availability of a mortgage interest tax deduction, their tax return isn't affected because they are better off taking the standard deduction.

Below is my response.

Mike,

I don't own, so I can't relate any personal experience. But I have heard from some people that the mortgage interest deduction isn't all that great. The primary reason is that there are so many other ancillary costs associated with homeownership. Lawn care, repairs, upgrades, pool maintenance, special assessments, busted appliances, leaky roofs, insurance, [edit: HOA fees,] etc. etc. It makes it pretty much a wash.

When you are a renter, you don't have to worry about any of that shit except for some utilities (homeowners have to worry about ALL utilities). And homeowners have to fret about special assessments, future increases in parcel and property taxes, increased utility rates, etc. You don't find that stuff on a bank's mortgage calculator.

And the article doesn't mention any of that! Meaning buyers aren't thinking about it either. The one I consistently hear from my homeowner friends and family is: "You have no idea how many, and how quickly, little expenses add up when you own."

That is why I personally calculate the pre-tax payment as a better comparison for rent vs. buy. That's more "real-world" and provides some cushion for unanticipated costs. That way, any tax write-off not offset by ancillary costs is pure gravy.

You can calculate the after-tax payment, but you can't COUNT ON IT, know what I mean? Like the article said, some people find out (after they've purchased, mind you!) that there is NO BENEFIT to itemizing and taking the interest write-off -- they're better off just taking the standard deduction! Could you imagine?!

As we're seeing in this current economic bust, too many people lived on the edge. And they are one unemployment spell or pay cut or busted water heater away from losing their house. Always always always plan for the unexpected.

I welcome any input from readers (especially those who enjoy the interest deduction every year) regarding your experiences/perspectives.